Star hedge fund manager Seth Klarman is open to investing in any asset by the time it is available at a price lower than its conservative valuation and providing good margin of safety. Investments can be as conventional as stocks and can be as unconventional as a Canadian mega quarry. In fact, only 20% of Klarman's total investing portfolio is comprised of and 60% of it is invested in unconventional assets including this quarry. Other assets include distressed debt, debt restructuring, etc.

So what exactly is Klarman getting out of this investment? The quarry investment could provide an exponential return over time. Based on recent market prices, the volume of limestone in the proposed quarry is worth more than $6 billion. And its value could be on the rise. The Ontario government expects demand for limestone and other rock used in construction to increase by 13% annually over the next two decades, driven by an ongoing population and construction boom in the province.

In a broader sense, Klarman's willingness to put money into a Canadian quarry is reflective of his view that stocks today offer little value. The really big potential gains, he believes, are in more complex investments. Klarman is not bullish on the recovery. "With most of the world's developed economies grappling with structural budget deficits and a grim outlook," he wrote to clients last July, "and because all foreseeable solutions to excessive borrowing and spending will dampen global economic activity, we find it hard to be optimistic about the economy."

At Baupost's client meeting this past October, Klarman told investors that stocks were neither cheap nor expensive. It is the Federal Reserve's policy of near 0% interest rates combined with government bailouts, he believes, that have driven asset gains since the financial crisis. "Massive government intervention in the wake of the 2008 financial crisis is now widely considered to have been a good thing," he wrote in July. "We remain unconvinced." He worries that the next crisis could be worse than the one in 2008.

Baupost's own mining venture in Ontario, meanwhile, has gotten bogged down amid rising anger toward Klarman and his partners. Wealthy Toronto residents with weekend homes near the proposed site have taken up the fight, and STOP THE MEGA QUARRY signs have appeared downtown. In September, Ontario's Ministry of the Environment ordered a full environmental assessment, an unusual move that could require two years of studies before the project can proceed. But as Klarman knows well, the payoff on a great investment is always worth the wait.

About the author:

Dheeraj Grover

I am an individual investor with deep interest in the field of value investing. My ideas and thinking is inspired by highly respected value investors like Ben Graham, Warren Buffett, Walter Schloss, Bill Ruane and Tweedy Browne

Comments

Seth Klarman's Canadian mega-quarry proposal is a terrible proposal if you have any ethical concerns whatsoever for high risks of irreversible water contamination near large populations in a neighboring country. If you would like the excitement of being associated with a project which has whitewashed phony environmental studies behind it, that could become a poster project for rape of the earth, consider investing in this. Go to www.ndact.com before you make any decisions. If you are either informed or smart, you will walk away from this. This is not a wise investment unless deliberately funding Three Mile Island environmental disaster type projects appeals to you. A mine deeper than Niagara Falls on the headwaters of 5 rivers is an invitation to an environmental, legal, and political nightmare. There are wonderful ways to invest in good projects and make money. This is not one of them. The only way Baupost got the land to begin with, some of the best farmland in the world, was through deceit and trickery. Baupost's name will stink if this goes ahead.

3191574 Nova Scotia Company Limited, doing business as The Highland Companies and backed by Baupost, has purchased 8,000 acres of prime farmland in Melancthon Township, Ontario under the guise of being potato farmers. Last year they showed their true motives by proposing a 2,300 acre limestone quarry (3km x 5km called a "mega quarry") with target extraction 250' below the water table. The company is looking to make billions of dollars (estimates are $18 million/acre) at the expense of Canadians.

In addition to becoming the death knell of a productive farming industry, allowing this quarry to proceed would jeopardize the headwaters of 5 major rivers. Water from the area runs south to Lake Erie, west to Lake Huron and north/east to Georgian Bay. The water is the source drinking water for one million Ontarians. Quarry operations would require management of 600 million litres of water per day and it is estimated that 1 tonne of undetonated explosives would contaminate the water on a daily basis.

What Klarman and Baupost investors fail to realize is that there is good value in fresh food, clean water, culture, heritage, and community, and that 'collateral damage' means 'everyone'. Any crook can make money at the expense of another.

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